Scenario presets
Reconciliation Parameters
Operating Cash Flow Results
Calculating cash flow...
- Operating Cash Flow (CFO / OCF)
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- Total non-cash add-backs
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- Net Working Capital cash impact
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- Free Cash Flow to Firm (FCFF)
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- Cash conversion ratio (OCF / Net Income)
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- Operating cash flow margin (% of Rev)
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- Free cash flow margin (% of Rev)
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Sensitivity Analysis 1: Net Income vs. Depreciation on Operating Cash Flow ($)
Operating Cash Flow ($) across accounting net earnings swings and non-cash depreciation volume.
| Net Income \ Depreciation | -30% | -15% | Base | +15% | +30% |
|---|
Sensitivity Analysis 2: Receivables Build vs. Inventory Build on Working Capital Cash Flow
Net Working Capital cash flow ($) across customer credit collection delays and inventory accumulation.
| Δ AR \ Δ Inventory | -50% | -25% | Base | +25% | +50% |
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Cash Flow Reconciliation Waterfall Schedule
| Cash Flow Bridge Component | Cash Flow Impact ($) | Category |
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Formulas and worked example
- Operating Cash Flow: OCF = Net Income + Non-Cash Charges + ΔNWC Cash Impact
- Non-Cash Charges = Depreciation + Amortization + Stock Compensation
- ΔNWC Cash Impact = -(ΔAccounts Receivable) - (ΔInventory) + (ΔAccounts Payable) + (ΔAccrued Liabilities)
- Free Cash Flow: FCF = Operating Cash Flow - Capital Expenditures (CapEx)
- Cash Conversion Ratio: Conversion % = (Operating Cash Flow / Net Income) × 100
- OCF Margin % = (Operating Cash Flow / Revenue) × 100
An industrial manufacturing firm earns $25,000,000 in net income on $150,000,000 revenue. Non-cash depreciation and stock compensation add back $16,000,000. Working capital changes drain $3,000,000 in cash ($4M AR increase + $3M inventory build - $2.5M AP extension - $1.5M accrued liabilities). Operating Cash Flow is $38,000,000 (152.0% cash conversion, 25.33% OCF margin). After $12,000,000 in CapEx reinvestment, Free Cash Flow to Firm equals $26,000,000.
Self-check quiz
1. Operating Cash Flow differs from Net Income because:
2. An increase in Accounts Receivable during a fiscal quarter represents:
3. A Cash Conversion Ratio (OCF / Net Income) consistently below 70% suggests:
4. Free Cash Flow (FCF) is calculated by subtracting what from Operating Cash Flow?
Frequently asked questions
What is Operating Cash Flow (OCF) and how does it differ from Net Income?
Operating Cash Flow measures the actual cash generated by core commercial activities, whereas Net Income is an accrual accounting figure that includes non-cash expenses (like depreciation) and uncollected revenues (accounts receivable). OCF shows cash liquidity regardless of accounting timing.
How do changes in working capital impact Operating Cash Flow?
An increase in current assets (such as customer receivables or unsold inventory) consumes cash and reduces OCF. Conversely, an increase in current liabilities (like delaying payments to vendors via accounts payable) preserves cash and increases OCF.
Why are Depreciation and Amortization added back to Net Income?
Depreciation and amortization reduce reported net income on the income statement, but they require zero cash outflow in the current operating period (the cash was spent when the capital asset was purchased). Therefore, they must be added back to reconcile accounting profit to actual operating cash.
What does the Cash Flow Conversion Ratio indicate about earnings quality?
The Cash Flow Conversion Ratio (OCF divided by Net Income) indicates earnings quality. A ratio consistently above 100% demonstrates high cash-backed profitability, while a ratio well below 80% signals aggressive revenue recognition, growing uncollected receivables, or unsold inventory buildup.